China now boasts at least one top-ten company in six industrial sectors, highlighting the country’s position as a growing economic force. But are the stocks over-priced? We take a look at your investment options for Chinese success.
According to an analysis of MSCI data by Fidelity International, the investment management group, despite representing just 3.3% of world equities, Chinese companies quoted on mainland markets rank at the top or close to the top of valuation tables in mobile phones, banks, life insurance, real estate, oil and gas producers and forestry and paper.
When the MSCI updates its indices at the end of the month, PetroChina will be shown to have become the largest listed company in the world having risen from 20th to first place in the last few days following a limited public offering.
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As well as now being home to the world’s largest company the People’s Republic also claims the world’s most valuable bank in the form of China Construction Bank and the biggest mobile phone company (China Mobile) on the planet.
In April, Finance Daily reported claims made by the National Institute Economic Review (NIER) that China will become the world’s largest economy by the end of the decade. Read More:
China has experienced average economic growth of more than 10 per cent per annum since 2003 and economists predict that the country is on course to maintain similar growth rates for the next two years at least.
At the turn of the century, just two Chinese companies ranked in the top ten of their sector: China Mobile and Citic Pacific, the industrials group. Since then, there has been a wave of public flotations, with no fewer than 114 Chinese IPOs so far in 2007 alone with a further 80 in Hong Kong. Chinese listings have already accounted for five of the top 20 fund raisings this year.
Extend the analysis to the top 20 ranking companies and China features in four more sectors: mining, industrial transportation, construction and materials and general industrials.
In fact, of the 88 Chinese companies in the 2,690 corporations that make up the MSCI World Index including China and Emerging Markets, 16 are ranked in the top 20 of their sectors.
Valuation concerns?
Valuations of some Chinese companies look stretched compared with their peer group. China Mobile, which at $406 billion has a market capitalisation twice that of its nearest rival Vodafone, has a forward price earnings ratio for 2008 of 25.6 times. Vodafone stock is forecast to trade on 15.8 times.
Similarly, China Construction Bank at $250 billion has leapt over HSBC, Bank of America and Citigroup to become the world’s largest bank. Its shares have a forward price earnings ratio for 2008 of 18.6 times, compared with 11.1 for HSBC, 9.4 for Bank of America and just 8.1 for Citigroup.
Safeguarding Risk
While returns from Chinese specific funds may prove lucrative, they also put potential investors at greater risk should the Chinese economy suffer a set-back. A strategy preferred by many advisers is to invest in Asia Pacific funds that offer significant Chinese exposure, but do not leave you with all your eggs in one basket.
Of these types of funds, Justin Modray at Best Invest financial advisers, likes the look of the Aberdeen Asia Pacific Trust, which splits investments between Singapore (18%), Hong Kong (16%), Korea (15%), Taiwan (7%) and mainland China (7%).
Countries such as Taiwan and Korea have significant trade with China and undoubtedly benefit from any boom, but it also means that they are less affected should things turn sour. Spreading investment between Asian countries certainly minimises the risk.
Other possibilities Modray suggests include the Invesco Perpetual Asian and Templeton Global Emerging Markets, both of which take a similar approach, splitting investments in order to minimise risk, between Hong Kong, China, Korea, Singapore, Taiwan and other emerging Asian markets.